The UK LTD, or Limited company, is one of the world’s most popular and reputable business structures. It is ideal for freelancers, startups, entrepreneurs seeking funding and entrepreneurs living in the EEA region. In this article, I cover how the UK LTD works, present practical use cases and explain how to register one.

 

Detailed analysis

The UK LTD offers excellent protection against liability and great structural flexibility. It is managed by one or multiple directors on behalf of the shareholders and is, what most people consider a normal corporation. This makes it different from my own favorite, the UK LLP, which is managed directly by its owners (the partners). Unlike the UK LLP, however, the UK LTD is a taxable entity. This means that it has its own tax burden, separate from that of its owners. Depending on the type of business you run and where you live, this may or may not be an advantage.

To better illustrate how this works, here are a few examples:

UK LTD + UK resident owner
In such a scenario, the UK LTD will always be considered resident for tax purposes. Its profits will thus be taxed at the normal corporate tax rate of 20%. It will also have to register for VAT once the 85000 GBP threshold has been reached (although there are exceptions). Dividends paid to the UK resident owner will be tax-free until the annual allowance has been reached and then taxed at a rate determined by the resident’s income tax bracket. In most cases, UK resident owners use a mix of dividends and salary payments to extract money from their business as efficiently as possible.

UK LTD + non-resident owner
In such a scenario, the UK LTD will not usually be considered resident for tax purposes. Instead, it will be considered resident for tax purposes in the country where its owner reside (management rules). It will be taxed in the UK at the rate of 20% on any income generated through a UK permanent establishment and in its country of residency on income generated elsewhere. Similarly to a resident LTD, it will only have to register for VAT once the 85000 GBP threshold has been reached (exceptions exist). Dividends paid to the non-resident owner are not usually subject to any withholding taxes in the UK but may be taxed elsewhere (such as the country where they are received).

UK LTD + Multiple owners
In such a scenario, the UK LTD’s residency will be determined by the location of its actual business activities (usually, where the board meets). As with the previous scenario, it will be taxed in the UK at the rate of 20% on any income generated through a UK permanent establishment and in its country of residency on income generated elsewhere. It will also be bound by the same VAT rules. Dividends paid to resident owners will be subject to UK taxation as stated in the first scenario while dividends paid to non-resident owners will generally be exempted as stated in the second scenario.

There are of course a multitude of other subtleties involved when it comes to taxation. Many of them are covered in Zero Tax Nomad, Freedom Surfer’s flagship course.

Compliance-wise, the burden imposed on a UK LTD is fairly reasonable, especially by European standards. Residents must file an annual return while non-residents only have to do so if they have taxable income in the UK. VAT is paid on a quarterly basis, via the one-stop-shop. Regardless of their residency status, all UK-registered companies must keep their books in order and available at all times.

 

Registration

It is fairly easy for a UK resident to self-register an LTD online. For non-residents the process can be fairly tricky to navigate, especially the tax angle. Freedom Surfer offers an all-inclusive LTD registration package that is designed with location independence in mind. It includes everything needed to get running, including tax advice, and the whole process can be completed in minutes, remotely. To learn more, visit our Business Registration page.

 

Case scenarios

UK LTD for freelancers

A UK LTD is the ideal structure for freelancers, especially those in Europe, who will appreciate its low tax and compliance burden. A UK LTD also allows for VAT registration which is crucial for certain type of freelance work. Best of all, a UK LTD will provide its freelancer owner with a reputation boost as well as access to more tools and services (Stripe invoicing for example).

 

UK LTD for startups

Startups rarely generate profits, at least not in the initial phases. As such, the issue of taxation is not nearly as important as it is for other types of businesses. What is really important here is access to an ecosystem in which the startup can grow rapidly and the UK is one of the world’s best. The UK LTD acts as the key to this ecosystem, granting the startup company access to some of the best business services in the world as well as a large pool of potential investors and talent.

 

UK LTD for investor funding

A UK LTD is the ideal structure for any entrepreneur looking for funding. The UK’s credit market is very mature with ample options covering most types of business activities. Most importantly, a UK LTD is a transparent entity which means that getting private investors money will be easier due to them being able to review and fully understand its ownership details and financials statements.

 

UK LTD for European entrepreneurs

The UK LTD has become a popular structure for European entrepreneurs seeking to avoid having to deal with the overly complicated and time consuming bureaucracy in their country of residency. In such a scenario, a UK LTD is registered by the European entrepreneur and is then run as a local company in the country where the entrepreneur resides. The UK LTD is subject to the same taxes as other local companies but benefit from simpler compliance and from the UK’s high reputation.

 

Sources

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-unitedkingdomhighlights-2017.pdf